Firms Should Revisit OTC Reporting Frameworks – Study

A new report from Tabb Group argues that with regulators becoming increasingly strict on OTC derivative trade reporting it is time for firms to consider a comprehensive review of the trade reporting process.

The report, Checking in on OTC Reporting Rules was authored by Tabb’s head of derivatives research Russell Rhoads, who points out that a key component to reducing risk levels in financial markets involves regulators having access to timely and accurate data. “With the new regulations mostly set in stone, now may be the best opportunity for firms to consider a comprehensive review of the OTC trade reporting process,” he says.

Regulators have, Rhoads argues, shifted their focus to refinement of new rules and strict enforcement of existing derivatives regulations, highlighted by the penalties levied on firms; the closer monitoring of all firms in the market; and the heavy emphasis on the delivery of timely and accurate data.

He adds that in doing their job, regulatory bodies are relying on the completeness of reported data to monitor risk and make further rule changes, pointing to the most recent update on the progress of OTC Derivatives Market reform from the Financial Stability Board included a heavy emphasis on data. “Its reliance on this data results in a heavy hand in assuring compliance,” Rhoads says.

As such, he continues, US and European regulators are much more vigilant in demanding trade reporting requirements be followed. Recently the CFTC and FCA have levied substantial fines on financial firms that reported inaccurate trade data. Some initial OTC derivative reporting fines were enforced back in 2015 and with increased frequency through 2016 and 2017, some rather substantial (although he is at pains to note that none of these fines were implemented due to nefarious activity).

In the past, Rhoads says firms were reliant on a reporting arrangement with a specific trade repository, DTCC or the CME Group. “The effort and sheer cost to move from one to another may have resulted in a firm being beholden to its current provider,” he writes. “With a shift in regulatory oversight and required data, now may be the time for firms to re-evaluate their full reporting process, including vendors.

“The pace of regulatory change is slowing to a point where a review makes sense,” he adds. “There’s no such thing as business as usual in this space, which is why it’s imperative that your solution is the correct fit, cost effective, provides the level of service and issue resolution that you expect and has sufficient flexibility to adapt to future changes.”